By Henry Collins
We do not usually think of Thomas Paine as an economist and, indeed, his writings under this head are neither systematic nor particularly original. Nevertheless, his economic ideas reflect his attitude to wider political issues and show both a grasp of economic realities and a penetration in powers of analysis which have been consistently under-rated by his biographers.
The Case of the Officers of the Excise, which Paine wrote in 1772, is his first known political work of which we have any record. He backed up the claim of his fellow excisemen to improved pay and working conditions by drawing attention to “the high price of provisions” which he attributed to “the increase of money in the kingdom”. Rising prices, he argued, were harmful because they were unjust. To some they brought affluence; others might find their market situation strong enough to enable them to offset the effects of inflation by pushing up the price of their own products. But large numbers of people would find themselves in the same category as Paine’s fellow customs officers and would lack either the economic or the political strength to counter the effects of inflation.
Paine returned to the question eight years later when, in The Crisis Extraordinaza,he dealt with the problems of war finance at the time of the American revolution. The Federal Government had come to depend increasingly on paper money to cover its expenses. Paine underlined the inflationary consequences and stressed the importance of meeting public expenditure out of taxes and loans rather than by the printing press. Assessing the needs of the central government at £2 millions a year, he proposed raising half the sum by taxes and half by loans at 6 per cent. Paine would have preferred to raise the entire sum by taxes but he recognised that in view of the primitive state of government machinery this was unpractical. In the circumstances he recommended that half the money should be raised by loans and half by taxes. These should consist mainly of import duties – since there were only a few points of entry they would be comparatively easy to collect – and by excise duties on liquor. He argued the case for the latter in characteristic Paine style, with a touch of salty irony: “How often”, he remarked, “have I heard an emphatical wish, almost accompanied by a tear, ‘Oh, that ‘etir-poor fellows in the field had some of this!’ Why then need we suffer under a fruitless sympathy, when there is a way to enjoy both the wish and the entertainment at once?”
Paine’s views on war finance in particular, and on monetary policy in general, were developed more explicitly in his Letter to the Abbe Raynal, which appeared in 1782. Inflation and taxation, it argued, were two alternative ways of paying for a war and, of the two, taxation was much to be preferred. However, it needed an administrative machine that might not be available to a revolutionary Government, so that inflation might be used as a temporary expedient. Otherwise taxation, by directly reducing demand, made people aware of the real costs which were being incurred, and so occasioned frugality and thought”, while inflation gave rise to “dissipation and carelessness”. Moreover, taxation gave governments some control over the allocation of the burden and this, in democratic conditions, increased the likelihood that it would be fairly distributed. As soon as possible after the war the currency should again be based on gold and silver. This would restore the public’s confidence and provide an automatic discipline on government.
Paine’s most recent biographer, Professor A.O. Aldridge, says baldly that: “Paine’s economics are now outmoded. Virtually a mercantilist, he considered gold and silver as the only form of capital”.”But to put the matter in these terms suggests some lack of historical imagination. Paine’s life was passed in a period of secular inflation which began in the 1740s„ when he was a child, and continued down to the end of the French wars. British wheat prices rose from less than 30/- a quarter in the early 1740s, to over 50/- in the early 1770s, when Paine left for America. By the 1790s they were over 70/- and still on a rising trend. By contrast, the wages of a craftsman in the Home Counties rose only from 2/- a day in 1740 to a day in 1800. Add to this the fact that Paine spent the most active periods of his political life supporting revolutionary governments which were desperately coping with the problems of war finance, and his ideas can be seen in reasonable perspective.
Professor Aldridge, writing in a period of full, Keynesian reaction to the depression of the 1930s, may have failed to grasp the significance of what Paine was saying. But to the radical of the late ei;Iteenth century, as to William Cobbett who in this, as in some other respects, became his disciple, the salient feature of inflation was that it re-distributed income in favour of the rich and to the detriment of the wage-earner and artisan. Taxation, by contrast, made possible a more equitable distribution of the burden and in this aspect of Paine’s Letter to the Abbd Raynal we can find the germ of the ideas which were to reach fruition ten years later in Part 11 of the Rights of Man.
After the end of the Revolutionary War, Paine found himself spelling out, in somewhat greater detail, his ideas on sound finance which then and later gave him an undeserved reputation for economic “conservatism”. The War had been followed by a slump and it seemed to many, including, for a time, a majority in the Pennsylvania Assembly, that trade would improve if the supply of paper money were to be increased. The agitation was directed against the Bank of Pennsylvania, which Paine had helped to establish during the War, and the reformers were demanding the repeal of the Bank’s charter and a substantial increase in the note issue. In 1786 Paine replied with a pamphlet, Dissertations on Government the Bank and Paper Money. The Bank’s opponents, mainly up-country farmers and their friends, complained that the Bank had a vested interest in keeping money scarce and therefore dear. On the contrary, wrote Paine, the role of a bank is to mobilise savings which would be otherwise unspent, and return them, through loans, into circulation. In doing so it earns its own profits while at the same time serving the interests of the farmers and merchants by increasing the amount of trade.
Paine was not against the use of paper money as such. But he insisted that whatever was printed must have a hundred per cent backing from the country’s reserves of gold and silver. This would not, as was feared, restrict trade by unduly limiting the supply of money. Paine showed that the volume of trade depended not only on the quantity of money but also on the efficiency with which financial institutions were able to attract deposits from the public’s savings and return them through loans back into circulation. Paine did not use the term “velocity of circulation” which was to feature so prominently in the later development of monetary theory, but he certainly employed the concept.
Like many of his contemporaries, Paine was obsessed by the growth of the National Debt. In 1786 he wrote Prospects on the Rubicon mainly to oppose the war which was clearly threatening between England and France. The pamphlet’s nAin argument was that England’s past wars had increased her National Dept and that this had resulted in “an unparalleled burden of taxes”. In consequence; “A few men have enriched themselves by jobs and contracts and the groaning multitude bore the burden.” Paine thought that the system was not only vicious but also unstable and that the further rise in the national debt which would result from a belligerent foreign policy would inevitably end in national ruin.
The War which Paine had foreseen broke out in 1793. Three years later, soon after his release from the Luxembourg prison, he published The Decline and Fall of the English System of Finance, in which he carried these arguments further and re-stated them in more rigorous and systematic form. He argued that the system of financing wars by borrowing, which had been in operation since the late seventeenth century, was insidious. It meant that in the long run the national debt must grow faster than any possible increase in the gold reserve. Paine was here developing a theme he had already broached in Part 11 of his Rights of Man. Every expansion of the national debt would increase the load of interest payments which could only be met by further depreciating the currency. Paine was convinced that he had stumbled on a new economic law of epochal import- ance. In accordance with a principle analogous to the law of gavitat- ion, the developments he was describing must, he was convinced, accelerate in geometric ratio. “I have not made the ratio”, he insisted, “any more than Newton made the ratio of gravitation. I have only discovered it…”
As a piece of economic analysis, The Decline and Fall has serious limitations. The British economy turned out to be more firmly based and its tax system much more resilient than Paine – or, for that matter, any of his contemporaries – expected. Though Paine recognised the importance of the manufacturing industry in Britain and the United States, such industry was still in its early infancy. The industrial revolution had barely begun and no-one seems to have rightly assessed the strength which it was to give an economy or buoyancy it could impart to tax receipts. Paradoxically, however, despite its inadequacies as a long range economic forecast, The Decline and Fall was one of Paine’s more immediately influential publications. In 1797, the year following its appearance, the Bank of England was forced to suspend cash payments and Paine’s predictions seemed vindicated. From then on the automatic discipline of a paper currency linked to the gold reserve was removed and inflation- ary pressures were accentuated. As in America, the main sufferers included the self-employed artisans and wage-earners to whom Paine was linked by social origins and political outlook. In short, while Paine was wrong in thinking that a rising national debt would mean an inevitable economic collapse he was right to see in it an instrument for enriching the wealthy at the expense of the poor. When in 1803, his pamphlet came into the hands of William Cobbett it converted him at once from an acid critic of Paine to one of his warmest – and most influential disciples.
Paine wrote The Decline and Fall in Paris, soon after his release from the Luxembourg. During the winter of 1795-6, while still convaleso- ilk, he wrote what was to be his last important work, Agrarian Justice opposed to which appeared in 1797. To a greater extent than in any of his other writings, Paine dealt on the stark contrasts between wealth and poverty. He flatly asserted that the effects of civilisation had been to impoverish the mass of mankind. “Civilization…or that which is so called”, he maintained, “has operated two ways, to make one part of society more affluent and the other part more wretched than would have been the lot of either in a natural state.”
Paine saw the cause of poverty in the appropriation, by large land- owners, of the proceeds of other men’s labour. Land, the main source of wealth, was the natural gift of the Creator and its fruits should not be privately appropriated. On the other hand existing land had gained considerably from cultivation, the benefits of which belonged, by right, to the improver – that is, as a general rule, to the landowner., large or small. The solution, therefore, was not, as some had already begun to argue, the public ownership of land, but an inheritance tax of 10 per cent – more where land was not in the direct line of descent – to be used to finance cash grants of £15 to all on reaching the age of 21, and an annual pension of £10 to everyone over the age of 50. The same pension would also be available to the disabled. The interest of this pamphlet lay not only in its detailed proposals, which completed the social security programme outlined in Part 11 of the Rights of ° but also in the underlying philosophy which rejected a return to an agrarian society and fully accepted, indeed welcomed, the part played by manufacturing industry in promoting the general welfare.
Paine’s ideas on economics and finance were of a piece with his approach to politics. Applied science and the development of industry could bring undreamed of benefits to humanity, but only so long as their fruits accrued to the labouring men and small property owners who were, in his view, the creators of wealth. The economy would grow best in conditions of “sound” finance. Wars, paper currency not linked to gold, inflation and a rising national debt made up a complex which redistributed wealth in the interests of the rich.
On this ground and within these limits it is difficult to say that Paine was wrong.
(The edition of Thomas Paine’s Key Writings edited by Harry Hayden Clark (Hill and Wang, New York, 1965) announces on the front cover that The (sic) Rights of Man is published, along with other writings, “complete”, perversely omits the entire social security programme of Part 2.)
- Man of Reason. The Life of Thomas Paine, 1960, p.121.